Philippa Kaur

WOMEN IN THE top ranks of business have broken three important records of late. The number of female bosses at the helm of Fortune 500 companies in America reached an all-time high of 41. In 2021 CVS Health, the country’s fourth-biggest firm by revenue, became the largest to be run by a woman. And for the first time, two of America’s largest businesses—Walgreens Boots Alliance, another chain of chemists, and TIAA, a financial-services firm—are run by black women.In America and other well-off places women are making strides in business, according to The Economist’s glass-ceiling index, an annual snapshot of female empowerment. The share of women on corporate boards, for example, is rising in most places (though it has dipped in progressive Sweden since 2019). Some of this is down to mandatory quotas; female boardroom representation surged in the Netherlands and Germany after those countries introduced such rules. But laws aren’t everything. Voluntary targets set by the British government have also boosted the share of women on the boards of FTSE 100 companies, from 12.5% a decade ago to nearly 40%. Investors targeting environmental, social and governance (ESG) factors are increasingly pressing firms to treat male and female employees equally.Still, businesswomen have a long way to go before they catch up with their male counterparts, especially in the upper reaches of corporate hierarchies, and in some respects trail their female colleagues in politics (see chart). Men still occupy more than two in three boardroom seats in America. In South Korea, they hog more than nine in ten. Women still earn less than male colleagues (never mind that girls outperform boys at school across the OECD club of rich countries). In America outcomes are worse for women of colour, who make less than white women and are even more underrepresented in senior roles.More troubling still, more women are dropping off the corporate ladder altogether. Although pandemic-era remote work made it easier for some women to combine work with family chores (still performed mostly by mothers and wives), covid-19 has pushed a disproportionate number of them out of the labour force. Women’s labour-force participation in OECD countries declined from 65% before covid-19 first hit to 63.8% a year later. Stymying female advancement may be yet another insidious consequence of the virus. For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

THE RUSH from Russia was unlike anything in recent memory. Within days of Vladimir Putin’s invasion of Ukraine, American companies from Apple to ExxonMobil suspended their business in Russia or said they would abandon it. Companies with factories and other assets in the country are now mulling ways to fend off possible expropriation. American technology giants are embroiled in a battle over misinformation—Russian authorities blocked access to Facebook on March 4th and said they would jail or fine those spreading “fake” news about the war. A day later Visa and MasterCard said they would suspend all operations in Russia.For companies, the Russia risks are extreme. They also point to a broader phenomenon. American multinational firms find themselves astride a fracturing world. Countries that once used commerce to ease relations with geostrategic competitors increasingly use tariffs and sanctions to undermine perceived adversaries. Politicians from Beijing to Brussels hope industrial policy will protect their economies from external pressure, be it a war, pandemic or geopolitical rivalry. Joe Biden, America’s president, used his state-of-the-union speech on March 1st to extol the merits of protectionism. “Instead of relying on foreign supply chains,” he intoned, “let’s make it in America.”As the rules of global commerce change, America’s biggest companies are changing, too. They are testing ways to minimise their risks and benefit from industrial policy when they can. It is a treacherous endeavour. Since the start of the year share prices of American firms focused on the domestic market have slumped by 5%, according to Goldman Sachs, a bank. American companies dependent on overseas revenue have seen theirs plunge by nearly three times as much. Not long ago multinationals seemed spoiled for choice. The collapse of the Berlin Wall in 1989 heralded the entry of the Soviet bloc into the global trading system. On signing the North American Free Trade Agreement in 1993, Bill Clinton predicted an export boom for American business. China’s entry to the World Trade Organisation in 2001 would, boosters said, help America Inc tap China’s huge market and make the Communist Party less mercantilist. For American companies, the world was not just their oyster but a towering platter of fruits de mer. Overseas markets remain essential to many American companies. In 2020 they supplied 28% of the revenue for companies in the S&P 500 index of America’s biggest firms, according to Goldman Sachs. The technology industry is particularly outward facing, earning 58% of revenue overseas. Companies with higher exposure to foreign markets have outperformed the broader stockmarket over the past half-decade (see first chart). Firms continue to chase opportunities far from home. Last year low interest rates and ample cash inspired American companies to spend $506bn on foreign mergers and acquisitions, more than twice the sum in 2020 or 2019, according to Dealogic, a data firm. In the first nine months of 2021, the latest figures available, net foreign direct investment had already exceeded the annual level in 2020 (see second chart). These new investments may do less to boost the bottom line than in the past. In recent years foreign countries have contributed a declining share of corporate earnings, not just because domestic profits have soared but because foreign ones have stagnated. In the third quarter of 2021 the most recent data available, all American companies (listed and unlisted) earned 18% of their profits abroad, compared with 24% three years earlier (see third chart). Many factors influence a multinational company’s performance abroad, including a country’s recovery from the pandemic and the strength of the dollar. American firms are watching to see if governments advance a global minimum corporate tax—more than 40% of their foreign direct investment is held in tax havens. Most important, perhaps, geopolitical risks can no longer be ignored. Start with Russia. Companies that have announced they will leave now face the difficult task of actually doing so. ExxonMobil has cautioned that it would be unsafe suddenly to abandon the oil project it operates in Russia’s far east. Some bosses fear that Mr Putin will retaliate against Western companies by seizing their assets in Russia. American companies can restructure to hold their Russian business in a foreign jurisdiction, notes David Pinsky of Covington & Burling, a law firm. That may let them challenge any state takeover in international arbitration, rather than put themselves at the mercy of Russian courts. Some Western firms may worry that their exit could hurt ordinary Russians. The suspension of Visa and MasterCard payments has made it harder for those members of Russia’s middle class who want to flee Mr Putin’s regime to pay for tickets out of the country, for example.Companies’ problems in China, a more powerful autocracy, are less acute but more consequential in the long term. China’s economy is roughly ten times the size of Russia’s. Tariffs imposed by Donald Trump during his presidency remain in effect—and ineffective. The Economist estimates that more than $100bn in Chinese-made goods may have dodged American tariffs last year. Mr Biden has been slow to advance a new strategy. He intends to announce a framework for strengthening economic ties with other countries in Asia. However, there is little support in either party for a multilateral trade deal. For now, many companies find themselves playing by China’s rules, both within the country and beyond it. They face state-backed giants that account for 27% of the world’s top 500 companies by revenue, compared with 19% a decade ago. Other countries with a history of economic nationalism are dusting off old ideas. India’s prime minister, Narendra Modi, has echoed Mahatma Gandhi’s calls for self-sufficiency and imposed tariffs to support local manufacturers. Mr Modi’s government is designing an open-source platform for e-commerce, in part to challenge Amazon and Walmart. Mexico’s government, led by Andrés Manuel López Obrador, has bailed out Pemex, the state-owned oil company. Last year an American energy firm, backed by KKR’s private-equity barons, was closed at gunpoint by Mexican authorities. Even many less nationalistic governments are getting back into the business of shoring up industries deemed crucial to national interests. South Korea, the EU and, with bipartisan backing, America itself want to support domestic production of semiconductors. America’s Senate and House of Representatives have each passed a bill aimed at helping America compete. It brims with handouts for research, training and favoured industries (including more than $50bn for chipmaking).The new protectionism includes sticks as well as carrots. The bill passed by the House of Representatives would impose capital controls, authorising the commerce department to block American companies’ investments in China. Europe’s pursuit of “digital sovereignty” seeks to protect citizens’ data, crack down on American tech firms and advance local competitors. Britain attracted one-fifth of American companies’ foreign deals last year, to the dismay of some British politicians. In February Nvidia, an American chip-designer, abandoned a $40bn attempt to buy Arm, a Japanese-owned owned one based in Britain. American trustbusters feared the combined group’s effect on competition; their British counterparts worried about national security.American companies are trying to adjust. To reduce reliance on China, companies are increasingly sourcing products and inputs from Taiwan, Thailand and Vietnam. The share of American imports from other low-cost Asian countries climbed from 12.6% in 2018 to 16.2% in 2020., according to Kearney, a consultancy. Orders of robots and other automated systems in America have surpassed their pre-pandemic peak, suggesting that manufacturers are using automation to lower production costs at home as a tight labour market raises wage costs. Last year General Motors followed Tesla’s example and invested in a lithium project in California, to boost supply of a commodity essential to its electric-car strategy. American carmakers are both responding to and emulating China’s state-backed firms, which have long valued security over mere efficiency.Reconfiguring supply chains is, however, neither straightforward nor cheap. Few countries can match China’s vast pools of skilled workers, notes Stewart Black of INSEAD, a business school, so American companies are loth to abandon it completely. Intel’s boss, Pat Gelsinger, said in January that he was seeking “a duplicity of supply chains available across the globe”. That includes manufacturing in rich countries with higher costs. “You need either redundancy or resiliency built into your systems,” says David Kostin of Goldman Sachs. The alternative is to keep higher inventories, which makes for a less efficient use of working capital.Companies would, of course, happily accept government largesse in exchange for investments. But handouts are not the only thing that determines investment decisions. And politicians are sending mixed signals. Mr Biden has highlighted the need to secure critical minerals, while doing little to help companies obtain them. Mr Gelsinger, a special guest of Mr Biden’s at the state-of-the-union address, looked on awkwardly as the president said Intel would quintuple a planned investment in Ohio, to $100bn, if only Congress would authorise more subsidies. Many European politicians likewise pair industrial ambition with a propensity to argue about it. In February the eu unveiled a plan to subsidise semiconductor manufacturing, but may not come up with the €43bn ($47bn) to do so, since much of the money would have to come from member states and the private sector. They are also making life harder for American firms—though not yet hard enough for the companies to up sticks. To comply with French rules for cloud-computing providers, for example, last year Google said it would form a joint venture with a local company. This year Google agreed to pay French publishers for publishing snippets of news. Amazon and Walmart are so far sticking it out in India’s e-commerce market, despite continued lawsuits, shifting regulations and no profits. China shows just how delicate this balancing act can get. Some companies manage it skilfully. Take Honeywell, an American conglomerate with a sprawling business in China. Honeywell continues to produce and sell avionics to Chinese customers, points out Mr Black, even though aviation is a sector in which China plans to promote domestic champions and become self-reliant. Specialising in complex technology that serves China’s broader goals helps: Honeywell provides navigation systems for the COMAC C919, a narrow-body jetliner that China hopes will compete against the Airbus A320 and the Boeing 737. Other companies, less adroit at the high-wire, become contortionists instead. In Russia most American tech firm have beaten only a partial retreat. To abide by Chinese cyber-security laws, Apple stores and shares iPhone users’ data with a state-backed company. Since 2018 American firms have all but stopped challenging patent infringement in Chinese courts, according to cases tracked by Rouse, a firm specialising in intellectual property. That is not because patent infringement has stopped, reckons Doug Clark of Rouse. Rather, heightened tension may have made American firms wary of retaliation. In China, says Jue Wang of Bain, a consultancy, firms are mapping out ways to respond to geopolitical risks or intensified support for state champions. As the 1990s dream of a single integrated global market shatters, firms in America, and everywhere else, face a brutal adjustment. More

HERE ARE some common characteristics of cults. They have hierarchical structures. They prize charismatic leaders and expect loyalty. They see the world as a hostile place. They have their own jargon, rituals and beliefs. They have a sense of mission. They are stuffed with weirdos. If this sounds a bit familiar, that is because companies share so many of these traits.Some cult-companies are easier to spot than others. Their bosses are more like deities than executives. These leaders have control of the company, and almost certainly founded it. They have name recognition among the masses. They really like rockets and have a brother called Kimbal.But in other cases it can be hard to tell where a company ends and a cult begins. That is true even of employees. So here is a handy guide to help you work out whether you are in a normal workplace or have fallen into the clutches of an even stranger group.Workforce nicknames. It is not enough to be an employee of a company any more. From Googlers and Microsofties to Pinployees and Bainies, workforce nicknames are meant to create a sense of shared identity. If you belong to one of these tribes and use its nickname without dying a little inside, you may be losing your grasp of reality. If you work in the finance team and are known as one of the Apostles of the Thrice-Tabbed Spreadsheet, you already have.Corporate symbols. Uniforms are defensible in some circumstances: firefighters, referees, the pope. And so is some corporate merchandise: an umbrella, a mug, a diary. But it can easily go too far. Warning signs include pulling on a company-branded hoodie at the weekend or ever wearing a lapel pin that proclaims your allegiance to a firm. If your employer’s corporate swag includes an amulet or any kind of hat, that is also somewhat concerning.Surveillance. It is reasonable for executives to want to know what their workers are up to. But it is not reasonable to track their every move. Monitoring software that takes screenshots of employees’ computer screens, reports which apps people are using or squeals on them if a cursor has not moved for a while are tools of mind control, not management.Rituals. Rites are a source of comfort and meaning in settings from sport to religion. The workplace is no exception. Plenty of companies hand out badges and awards to favoured employees. Project managers refer to some meetings as “ceremonies”. IBM used to have its own songbook (“Our reputation sparkles like a gem” was one of the rhymes; “Why the hell do we have this bloody anthem?” was not). Walmart still encourages workers in its supermarkets to bellow a company cheer to start the day. Some of this is merely cringeworthy. But if you are regularly chanting, banging a gong or working with wicker, it becomes sinister.Doctrines. More and more firms espouse a higher purpose, and many write down their guiding principles. Mark Zuckerberg recently updated his company’s “cultural operating system”—which, among other things, urges Metamates (see “Workforce nicknames”) to defy physics and “Live In The Future”. Amazon drums its 16 leadership principles (“Customer Obsession”, “Think Big”, “Are Right, A Lot”, and so on) into employees and job candidates alike. Corporate culture matters, but common sense doesn’t become a belief system just because capital letters are being used. If values are treated like scripture, you are in cult territory.Family. Some companies entreat employees to think of their organisation as a family. The f-word may sound appealing. Who doesn’t want to be accepted for who they are, warts and all? But at best it is untrue: firms ought to pay you for your time and kick you out if you are useless. At worst, it is a red flag. Research conducted in 2019 into the motivations of whistle-blowers found that loyalty to an organisation was associated with people failing to report unethical behaviour. And the defining characteristic of families is that you never leave.If none of the above resonates, rest easy: you are not in a cult. But you are unemployed. If you recognise your own situation in up to three items on this list, you are in an ordinary workplace. If you tick four or five boxes, you should worry but not yet panic; you may just be working in technology or with Americans, and losing your sense of self may be worth it for the stock options. If you recognise yourself in all six items, you need to plan an escape and then write a memoir.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Company or cult?” More

THIS IS A big week for Tesla’s “gigafactory” in Grünheide, near Berlin. According to the German press, the American electric-car maker will get the final green light from local authorities to start operations within days. In one way, it already has. On February 28th Tesla workers elected their first works council, a group of employees that in German law co-decide with managers things like working hours, leave and training.For Elon Musk, Tesla’s anti-union chief executive, this must rankle. He has tried to shield his first German plant from Germany’s strict labour laws by incorporating the business as a Societas Europaea (SE), a public company registered under EU corporate law that is exempt from some “co-determination” rules, such as the requirement for firms with more than 2,000 employees to give workers half the seats on supervisory boards. SEs are not, however, exempt from having a works council.IG Metall, Germany’s mightiest union, which represents auto workers, has been on a collision course with Mr Musk ever since he refused to sign up to collective wage agreements for the industry (the only other firm not included is Volkswagen, which has its own generous wage deal). It has set up an office close to the gigafactory to advise Tesla workers about their rights and listen to their complaints. It has employed a Polish speaker to organise employees that Tesla is hiring across the border in Poland. It hopes that persuading enough Tesla workers to join its ranks would add oomph to its campaign to join the collective wage deal; the union says the company pays senior staff well but that production-line workers get a fifth less than those at BMW and Mercedes-Benz. Most important, it sees the works council as the first step to full co-determination.Mr Musk must see it differently. He may have fast-tracked the election in order to get a more sympathetic council. Tesla has so far hired only around 2,500 mostly senior and skilled workers, out of a workforce that will grow to 12,000 or so. Such employees are likelier to see eye to eye with management. The rest of Deutschland AG will be watching to see if Germany changes Tesla into something less abrasive or if Tesla changes Germany’s labour relations into something less consensual. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “A lesson in business German” More

AS THE TRAGIC human consequences of Russia’s invasion unfold, there is little to celebrate beyond the stoic resistance of outgunned Ukrainian forces and Western unity in facing up to the unprovoked aggressor. One side-effect of the war is a sudden and profound shift in European attitudes to defence spending. Those expectations are behind a surge in the market value of firms that supply the weapons with which war is waged (see chart).The idiosyncratic nature of the defence industry explains why it was having a good year even before Vladimir Putin sent tanks into Russia’s smaller neighbour. Arms makers’ customers are mainly governments. Guaranteed sales translate into predictable revenues. Contracts designed to pass on cost increases shield companies against inflation. The ability to withstand rising prices was a big reason for the sector’s outperformance relative to the stockmarket as a whole in the past few months.McKinsey, a consultancy, notes that defence budgets—and so armsmakers’ revenues—are a function of threats and affordability. The spike in share prices since the attack on Ukraine reflects investors’ belief that the threats will outweigh the costs in governments’ calculations. Germany made the first move, surprising pundits with an about-turn. On February 27th it said it would spend an extra €100bn ($111bn) on defence in 2022, tripling its defence budget for the year. Besides this one-off investment, Germany aims to raise its annual spending from around 1.5% to 2% of GDP by 2024. A slug of the annual increase, equivalent to €18bn or so, will go on weapons.The Russian threat may well encourage other laggards such as Italy, the Netherlands and Spain to meet NATO’s guidelines for all members to spend 2% of GDP on defence. Citigroup, a bank, reckons that spending will now rise more rapidly and that 2% will become a de facto minimum across NATO. Jefferies, another bank, points out that if all NATO members meet the target, their combined defence budgets (excluding America’s giant one) will go up by 25% to a total of around $400bn a year. Outside NATO, Sweden and Finland, both within striking distance of Russia, are likely to ramp up spending, too.Defence spending covers an array of costs such as wages and operational expenses. Kit accounts for between a fifth and a quarter of the total. Jefferies reckons that procurement budgets in NATO (excluding America) could rise by 40-50% as armed forces gear up to face the Russian threat. Because European countries favour domestic arms manufacturers, European firms have seen the sharpest gains in their share prices. That of Rheinmetall, which makes military vehicles, weapons and ammunition, surged by nearly 70% in a matter of days. Hensoldt, a maker of military sensors, more than doubled its market value. Britain’s BAE Systems, Europe’s biggest defence firm, saw its share price rise by a quarter thanks to its large business serving European infantries. Thales of France and Leonardo of Italy made similar advances.For once, America’s military-industrial complex has lagged behind its European equivalent. Lockheed Martin, Raytheon and L3Harris sell equipment around the world, but mostly to America’s government. The Pentagon already accounts for nearly two-fifths of global spending (or nearly half if you exclude countries such as Russia and China, which are not markets for American weapons). American military spending is unlikely to rise as sharply as Europe’s. But the revived threat from Russia will put paid to the idea, floated by some in Washington, to limit it on the margin. Russian revanchism raises the likelihood that Congress will shovel more money to the armed forces in the coming years.Bernstein, a broker, points out that past regional conflicts, such as Russia’s invasion of Georgia in 2008, its annexation of Crimea in 2014, and the first Gulf war in 1990, boosted defence stocks for roughly six months, while the rest of the market wilted in the fog of war. The scale of the threat to Europe and the world, and the possibility of a long confrontation in Ukraine, may mean the boost lasts longer this time. That would perpetuate a secular trend. As Bernstein observes, weapons-makers have “massively outperformed” the S&P 500 index of big American firms for more than 50 years. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Advancing on all fronts” More

AFTER RUSSIA’S annexation of Crimea in 2014 Europe feared that Vladimir Putin would cut supplies of piped gas passing through Ukraine to European customers. That worry led Poland’s then prime minister, Donald Tusk, to issue a stark warning: “Excessive dependence on Russian energy makes Europe weak.” As a full-scale invasion of Ukraine by Mr Putin’s forces unfolds, Europe looks, if anything, weaker. Despite some efforts to diversify supply, install cross-border gas connections and build plants to import liquefied natural gas (LNG), in the decade to 2020 Russian exports of piped gas to the EU and Britain shot up by a fifth by volume, to make up roughly 38% of all that fossil fuel consumed in Europe. That year more than half of German gas came from Russia.Mr Putin’s latest aggression may at last shake the old continent out of its energy complacency. On February 22nd, as Russian tanks were preparing to roll into Ukraine, Germany suspended final approval of Nord Stream 2, a controversial new gas pipeline linking it with Russia. Days later the chancellor, Olaf Scholz, vowed “to change course in order to overcome our import dependency” with more renewables, bigger domestic stores of gas and coal, and revived plans for LNG terminals. At the EU level, a wide-ranging proposal to guarantee the bloc’s “energy independence”, due to be unveiled by the European Commission on March 2nd but postponed as a result of the war, is expected to advocate strategic stocks and mandatory gas storage to deal with the Russia risk in the short term, and a dramatic expansion of renewable energy and clean technologies such as hydrogen in the long run.That would be a giant shift in EU energy policy, which used to focus merely on ensuring that energy markets remain competitive. In the past few years, as climate became the dominant concern, the policy’s goals broadened. With the threat of Mr Putin’s weaponisation of energy looming ever larger, even the twin objectives are “not enough”, says Teresa Ribera, a Spanish deputy prime minister. The EU must now reconcile three competing objectives: cost, greenery and security.Europe has made real progress on the first horn of this “energy trilemma”. Liberalisation of energy markets has helped keep prices down through competition. The continent has also got serious about decarbonisation. But if Europe is to shake off its reliance on Russian gas, sacrifices on cost and climate may be unavoidable.Start with the short term. Last month Ursula von der Leyen, the commission’s president, insisted the EU could survive this winter even with “full disruption of gas supply from Russia”. Gas storage units were emptier than usual a few months ago, owing in part to low levels in those operated by Gazprom, Russia’s state-controlled gas giant which controls 5% of the EU storage capacity. They are fuller now. High prices have lured LNG cargoes from Asia. If Mr Putin turned off the taps, prices would rocket again—attracting more LNG. European governments would squirm, then pay up for the remaining weeks of winter, after which gas consumption drops off sharply. They have also secured promises of emergency supplies from Japan, Qatar, South Korea and other allies if needed. And they could tap “cushion gas”, a layer of stores not normally meant for consumption.Over the medium term, the outlook darkens. Nikos Tsafos of the Centre for Strategic and International Studies, a think-tank, reckons that Europe imports around 400bn cubic metres of gas a year. Replacing the 175bn-200bn it gets from Russia with a mix of alternative supplies and reduced gas consumption will be “very tough” beyond 2022, he says. Stumbling into spring with badly depleted stocks will make preparing for next winter difficult.To gird itself for a possible crunch, Europe needs to stockpile Russian gas while it is still flowing (ideally over the summer, when gas prices tend to dip). It has to find alternatives to Gazprom’s molecules, lest these evaporate. It needs somewhere to keep those alternative molecules until next winter. And it must tap non-gas energy sources to use the reserves sparingly.Easier said than done. EU law makes it hard to make Gazprom pump more gas to stockpile even in normal times, which these patently are not. European gasfields in Britain and the Netherlands are past their prime. North Africa, which typically supplies less than a third as much as Gazprom, cannot increase exports enough to offset the Russian deficit.Europe could regasify a lot more LNG than it is doing (see map)—if, that is, it could get more of the stuff. Contracted flows and limited global liquefaction capacity make that unlikely, explains Richard Howard of Aurora Energy, a research firm. LNG cargoes can be redirected from Asia at a price, but Asian customers preparing for their own winters will be eyeing them, too.To complicate matters, much of Europe’s regasification capacity sits on its western coasts in Spain, France and Britain. Trans-border gas connections and “reverse-flow” capabilities are better than a decade ago but still lacking. Spain’s under utilised regasification plants are useless in a crisis because its gas links over the Pyrenees are puny and hard to upgrade. Getting all that gas to Germany and other big inland customers is a (literal) pipe-dream, worries a European regulator.Given these constraints on supply, European demand may need to fall by 10-15% next winter to cope with a Russian cut-off, estimates Bruegel, a think-tank in Brussels. Matthew Drinkwater of Argus Media, an industry publisher, believes that “some rationing” may be necessary.The problems do not disappear in the longer term. Shell, a British energy giant, forecasts a gap between global supply of gas and demand for it in the mid-2020s. Europe will feel the pinch more than most because of the ways it has discouraged investment in gas. A reliance on spot markets attracts short-term supplies in a crunch but does not send a clear signal about longer time horizons. Adrian Dorsch of S&P Global Platts, a research firm, notes that despite risk for the winter after next, European utilities have done little to secure future supplies. Without government mandates or subsidies, seasonal price differentials are insufficient to justify investments in more storage, says Michael Stoppard of IHS Markit, a research firm.Europe’s green policies aren’t helping. The EU has been schizophrenic about gas. Some member states, like Germany and Ireland, accept that new gas plants are needed as back-up and a bridge to a cleaner future. Others, such as Spain, want to deny natural gas the “green” label for climate reasons. Although the EU has recently reclassified gas as a “green transition” fuel, the designation comes with lots of strings attached. The confused boss of a big American LNG exporter grumbles that no European utility will sign a long-term contract with him “because they don’t know what their governments will or won’t allow” a decade from now.Various think-tankers reckon Europe can wean itself off gas almost entirely. Simon Müller of Agora estimates that wind and solar energy could generate 80% of Germany’s power in less than eight years. Lauri Myllyvirta of the Centre for Research on Energy and Clean Air thinks it is feasible on paper to replace all of Europe’s Russian gas imports, equivalent to 370 gigawatts (GW), with renewables capacity. China plans to install more than that by 2025.Such projections look too rosy. Wind and solar farms are harder to build in democratic Europe than they are in command-and-control China. Christian Gollier of the Toulouse School of Economics points to “massive local opposition” in France to wind projects. Regional squabbles among regulators and other bureaucratic delays can stretch the approval process for Italian wind and solar installations to six years. According to S&P Global Platts, western Europe shut down 9GW of coal power and more than 5GW of nuclear power in 2021. Non-intermittent low-carbon replacements, such as battery storage and biomass, have not kept pace.As with gas, EU member states talk at cross-purposes when discussing alternative energy sources. While Germany has been shutting down its nuclear fleet, France and the Netherlands want to expand theirs. By 2030 Spain will phase out coal, whereas Poland will still get more than half its power from the dirtiest fuel (and replace most decommissioned coal plants with ones burning gas). This confused approach makes it harder to reach the common goal of ditching Russian gas.Even if Europe managed to pull off the shift to renewables, it would still need gas to heat homes and businesses. Though the power sector is often in the cross-hairs, it represents less than a third of western Europe’s gas demand. Residential use accounts for some 40%. Reducing gas use in homes requires heavy investments in electric heating, better insulation and super-efficient heat pumps.Some uses, like high-temperature heat in industrial processes, cannot be easily replaced by green electricity. On one estimate, only 40% of Europe’s industrial use of gas is in low-temperature applications that can be readily electrified. Hydrogen may one day do the job, as well as powering vehicles, generating electricity or providing long-term energy storage. But even the technology’s boosters like Ms Ribera in Spain concede that the hydrogen dream will take a decade or more to realise.None of this is impossible for Europe to achieve with wise policymaking and pots of money. If war on its door step doesn’t focus European minds, nothing will. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Out of Russia’s shadow” More

IT TOOK MORE than 30 years for BP, a British energy company, to build its Russian business. It took less than four days to decide to dismantle it. As Vladimir Putin’s forces invaded Ukraine early on February 24th, the logic of BP’s 20% stake in Rosneft, Russia’s state-owned oil giant, began to collapse. BP’s board met to discuss the matter on February 25th; later that day Britain’s business secretary, Kwasi Kwarteng, expressed the government’s concern to Bernard Looney, BP’s boss. By February 27th the board was ready to make its decision public: BP would sell its stake in Rosneft. Mr Looney has resigned from Rosneft’s board (as has his predecessor, Bob Dudley). The company may face a write-down of up to $25bn.Mr Putin’s war has prompted a reckoning for multinational firms. Russia presents a host of risks, from reputational damage to logistical disruption and the peril of violating sanctions. For many firms disentangling from Russia, a middling market, will do little damage to their broader business. For others it will be financially painful and logistically difficult.Many other multinationals have, like BP, spent decades scouring for opportunity in Russia. In 1974 Pepsi became the first Western product made and sold behind the Iron Curtain. Disney hoped to charm sullen Soviets with screenings of “Snow White” and “Bambi” in Moscow and Leningrad in 1988. More companies arrived after the collapse of the Soviet Union—Danone, a French yogurt-maker, peddled its snacks from a store on Tverskaya Street in Moscow in 1992. BP opened its first petrol station in 1996.Now companies are racing to devise new strategies for an uncertain era. The most decisive breaks with Russia came from entities with the least to lose. Norway’s sovereign wealth fund said it would freeze all investments in Russian equities—which account for a piddling 0.2% of its portfolio. Companies with larger exposures to the Russian market are more circumspect. Renault, a carmaker, and Danone earn 9% and 6% of revenue in Russia, respectively, and have announced no plans to scale back.Many Western businesses find themselves somewhere in between. Their response is similarly middling: a pause rather than a rupture. UPS and FedEx, two American logistics companies, have suspended deliveries to Russia. CMA CGM, Maersk and MSC, three European shipping giants, said they would not sail there. Bain, Boston Consulting Group and McKinsey, three management consultancies, are rethinking their business in Russia. Boeing is suspending deliveries of parts, maintenance and technical support for Russian airlines that use its aeroplanes.Some of these actions were doubtless provoked by companies’ fears that they might fall foul of an expanding array of Western sanctions against Russia. Volvo, a Chinese-owned carmaker based in Sweden mentioned “potential risks associated with trading material with Russia, including the sanctions imposed by the EU and US” as a reason for suspending sales in Russia.But companies are fielding explicit or implicit demands from their home governments and, in some cases, domestic consumers in effect to boycott Russia even beyond the scope of official measures. On March 1st Apple stopped selling its products in Russia. Disney and other Hollywood studios said they will delay the release of films on Russian screens. Google, Meta and Twitter are seeking to limit Russian propaganda on their online platforms.Some of these moves present quandaries for companies. Any decisions by tech firms in Russia, for instance, may complicate their situation in other controversial markets. Apple’s tough stance over the Ukraine war highlights its historically pliant position in China, a giant market that has admittedly not invaded any neighbours but whose rulers are accused of human-rights abuses. McKinsey’s declaration that it would not do business with “any government entity” in Russia comes after years of criticism for its work with state-backed enterprises there and in China. Complying with demands from governments seeking to punish Mr Putin presents practical problems for firms, as well as moral and reputational ones. Non-Russian companies that lease aircraft to Russian airlines are a prime example. They have more than 500 jets and turboprops in the country, according to Cirium, a consultancy. Those lessors have the unenviable task of trying to recover the planes before sanctions against the supply of aircraft take effect later this month.It is energy companies that have the most at stake. For years international oil firms provided capital and expertise to their Russian partners, who controlled the reserves and had the local know-how. In a sign of companies’ enthusiasm for Russia, European supermajors maintained investments there even as they trimmed their oil business elsewhere. Last year Rosneft accounted for 50% of BP’s reserves and 11% of operating profits. Shell, a rival British giant, operates joint ventures with Gazprom, Russia’s state-owned gas company. For TotalEnergies, a French company, Russia could supply 17% of growth in output over the next five years, reckons Wood Mackenzie, an energy consultancy.TotalEnergies, which has long tolerated risky jurisdictions, is resisting calls to exit. But energy firms are re-evaluating their positions in real time. Three other big firms—Shell, Equinor of Norway and ExxonMobil of America—have all said they would follow BP’s lead and leave. How quickly that might happen is another question. ExxonMobil has cautioned that safely exiting its project in Russia’s far east would take time. Selling stakes in joint ventures or in Rosneft itself may prove difficult, particularly if Russia’s government maintains the ban it has just imposed on the sale of foreign-owned Russian assets in order to stanch capital flight. The moral and reputational case for firms to leave Russia will become stronger the longer the war goes on. It may also become financially and logistically harder. Our recent coverage of the Ukraine crisis can be found here More

IN RUSSIA’S FROZEN north is a megaproject that has long been seen as an answer to President Vladimir Putin’s prayers. By the mid-2020s the Vostok oilfield is expected to supply about 15% of Russia’s crude exports. By that time Rosneft, the Russian oil giant leading the effort, plans to ship Vostok oil via the Northern Sea Route, a shortcut through the Arctic to Asia. The route will enable Russia to bypass the West geopolitically as well as geographically, allowing oil to travel along waters beyond the control of the American navy and out of reach of Western sanctions. Besides Rosneft, its backers include two mostly European oil-and-gas traders, Trafigura and Vitol. For years they have competed fiercely to be amongst the biggest buyers of Russian crude.These firms are part of a group of commodities traders, including Glencore and Gunvor, that often thrive amid geopolitical turmoil. They are clear-eyed realists who in the past have struck deals with autocrats to gain access to cheap raw materials. In recent years some have doubled down on Russia, doing business with the figures that surround Mr Putin, such as Rosneft’s boss, Igor Sechin, and winning big oil and liquefied natural gas (LNG) contracts (piped gas is the domain of Gazprom, a state monopoly). The arrangement served both sides well. The traders invested in Russia and secured more supply from the world’s third-biggest oil-producing country and biggest natural-gas exporter. Higher energy prices bolstered Russia’s hard-currency reserves.But if they believed Mr Putin’s goal was a modern economy that he would not jeopardise by invading Ukraine, they were wrong. In fact, oil revenues have financed an ever more autocratic and belligerent regime. After the West moved to strengthen penalties on Russia’s financial system on February 26th, they faced the consequences of their bet. As one executive put it two days later, everything in the Russian oil business was “frozen”: banks, ports, ships and suppliers. Auctions of Russian crude found no buyers. Prices of oil soared on global markets but so did the discounts on Russian Urals relative to international benchmarks. Fearing sanctions, Russian cargoes became kryptonite.Some traders initially said the paralysis would be short-lived. After all, oil and gas producers were spared sanctions in order to keep Russian energy flowing to the West. One executive described the biggest risk as “overzealous bank compliance officers” causing more damage to Russia’s oil market than the architects of sanctions intended. Yet the traders may have been in denial. The speed with which two European supermajors, BP and Shell, pledged to dump their Russian assets suggested that political and social pressure to withdraw from Russia was mounting in the wake of the invasion. On March 1st Glencore said it was reassessing its equity stakes in EN+, an Anglo-Russian aluminium producer, and Rosneft. A day later Trafigura said it was reviewing its investment in Vostok Oil as it unconditionally condemned the war. Usually the trading houses thrive in times of conflict by keeping their heads down and capitalising on volatility. Not this time. Russia’s war on Ukraine suggests their gamble on Mr Putin may have been a throw of the dice too far.In theory, excluding Russian oil and gas from sanctions should enable the trading houses to continue their day-to-day operations. In practice, it doesn’t because energy trading is as much about the flow of money as of molecules. Cargoes are financed by banks. They require letters of credit guaranteeing payment. They involve frequent messaging between banks working for the buyers and sellers. Until March 1st, when names were released of the seven Russian lenders potentially blocked from the SWIFT interbank-communications system, many energy-related transactions in Russia were halted, traders said, owing to the counterparty risk. Moreover, fears surfaced that as Russia’s aggression on Ukraine escalates, sanctions will be strengthened. “The tit has to be reasonably in line with the tat,” says Jean-François Lambert, a commodities consultant.The problem is exacerbated by the length of time cargoes of oil and LNG spend at sea. By the time they reach port, sanctions on Russian energy may be in place. “The biggest grey area is that no one knows what comes next,” says Daniel Martin, who specialises in shipping rules at HFW, a law firm. Logistical chaos compounds the uncertainty. Oil-tanker rates on the Black Sea adjacent to Russia and Ukraine have surged as fighting has intensified.As well as business risks, the trading firms face reputational ones. This is exacerbated by long-standing links with firms and individuals at the heart of the regime. In “The World for Sale”, a recent book, the authors argue that the merchants have probably been more engaged with Mr Putin’s autocracy than anyone in the world of international business. Despite a standoff between Russia and the West, they made vast loans to Rosneft in exchange for oil-supply deals. Two years after Russia seized Crimea in 2014, Glencore co-invested $11bn to buy part of the Russian government’s stake in Rosneft (it has since sold almost all of it). Trafigura and Vitol invested in Vostok and afterwards received supply deals from Rosneft. Mark Rossano, CEO of C6 Capital Holdings, a consultancy, believes that both the oligarchs and the traders were caught out by the economic reprisals that the war has unleashed.Merchant misadventurersThey will survive. Even with business in Russia in free fall, crisis breeds opportunity. As Western countries such as America release strategic reserves of crude to stop the price of oil soaring, they are queuing up for cargoes. If Western sanctions on the sale of Iranian oil are lifted so that it can offset a potential loss of Russian crude, they have the contacts to move the stuff. But these are dangerous times. The West’s reaction to Mr Putin’s war is visceral. It is one thing to be considered a non-aligned merchant providing the world with what it needs. It is another to be seen as a mercenary.Editor’s Note: After this article was published Trafigura issued a statement about its operations in Russia and condemnation of the war in Ukraine. We have updated the article to reflect this. More